March 31 (Bloomberg) -- The cold snap in the Eastern U.S.
persuaded hedge funds and other speculators to keep betting on
rising natural gas prices, accumulating the most bullish
position for this time of year since at least 2010.

The polar vortex that sent temperatures tumbling across the
country in January boosted consumption by households and power
plants to all-time highs. Waves of frigid weather through March
pushed stockpiles to the lowest level in 11 years.

Almost 3 trillion cubic feet of gas will need to go into
storage during the warm-weather months to cover winter demand,
something that’s never been done before. Bank of America Corp.
and BNP Paribas SA say stockpiles may rise to less than 3.5
trillion cubic feet by the end of October, about 300 billion
short of last year’s high. It will take the record production
forecast for this year to get there, said Francisco Blanch,
commodities research head at Bank of America in New York.

“We’re going to be in a tight situation,” Blanch said.
“It will be pretty hard to build inventories to 3.5 trillion
cubic feet by the end of the summer season.”

Net-long wagers on four U.S. natural gas contracts rose 0.1
percent to 409,266 in the week ended March 25, according to U.S.
Commodity Futures Trading Commission data released March 28.
That’s the most in data starting in 2010 and three times the
average for this time of year over that period.

Natural gas futures rose 3.3 percent this year on the New
York Mercantile Exchange. They fell 4.5 cents, or 1 percent, to
$4.411 per million British thermal units during the CFTC report
week. Gas settled at $4.485 on March 28 and slid 11.4 cents, or
2.5 percent, to close at $4.371 today.

Coldest Months

The U.S. experienced the coldest period of December through
February in 32 years, based on gas use and population, according
to Commodity Weather Group LLC, a forecasting company in
Bethesda, Maryland. Prices that surged to a five-year high of
$6.493 per million Btu on Feb. 24 tumbled 33 percent since then
as heating demand waned with milder weather.

Gas inventories dropped by 2.92 trillion cubic feet from
the end of October to 896 billion cubic feet on March 21, making
it the fastest pace of withdrawals for any U.S. heating season
in data going back to 1995, according to the U.S. Energy
Information Administration. A supply deficit to the five-year
average widened to a record 51 percent.

“The market seems to really be counting on this grandiose
assumption that we are going to produce our way out of this this
summer,” said Stephen Schork, president of Schork Group Inc., a
consulting group in Villanova, Pennsylvania. “We are going to
start refills up pretty soon and if they don’t get off to a good
start, a lot of these assumptions with regard to our ability to
produce will be called into question.”

Average Supply

On average over the past five years, stockpiles have
climbed to 3.832 trillion cubic feet by the end of October,
according to the EIA, the statistical arm of the Energy
Department.

Marketed gas production this year will climb by an average
1.78 billion cubic feet a day, or 2.5 percent, to 71.96 billion,
the EIA said in a March 11 report. Gains are being driven by new
wells at Marcellus shale deposit in the Northeast, where daily
output will reach 14.8 billion cubic feet in April, EIA data
show. That is an increase of 4.05 billion, or 38 percent, from a
year earlier.

The government estimated last month that this record
production will help increase inventories by 2.494 trillion from
April through October to 3.459 trillion, toppling the 2001
record injection of 2.402 trillion. The forecast was based on
supplies ending March at 965 billion.

Supply Issue

“The main issue with the North American supply picture is
that there are some great production economics in some parts of
the country and not so great in other parts of the country,”
Blanch said. There’s no way gas supplies will be replenished
before next winter if prices fall below $4 while prices above
$4.50 or $5 may get less profitable regions, such as along the
Gulf Coast, to return, he said.

“Producers are making the decisions on dimes and nickels
because dimes and nickels have a huge influence on returns,” he
said.

Net-long positions held by money managers, including hedge
funds, commodity pools and commodity-trading advisers, increased
by 325 contracts in the report week. Long positions rose 7,677
contracts, or 1.3 percent, to 613,374, the highest since the end
of February. Shorts gained 7,352, or 3.7 percent, to 204,109,
the most since Jan. 17.

Hedge funds cut their bullish bets on West Texas
Intermediate crude for a third week on easing concern that
Russia’s annexation of Crimea will disrupt shipments.

Money managers reduced net-long positions, or wagers on
rising prices, as the U.S. and European Union imposed sanctions
in response to Crimea’s March 16 ballot to leave Ukraine and
join Russia. Goldman Sachs Group Inc. said in a March 20 report
that there was a “low probability” that restrictions would be
extended to Russia’s oil and natural gas exports.

Net-long positions in the U.S. benchmark crude dropped by
8,917 contracts, or 3 percent, to 293,403 in the week ended
March 25, CFTC data show. Crude declined 51 cents to $99.19 a
barrel on the Nymex in the report week.

Bullish wagers on ultra low diesel, a category that
includes heating oil, rose 1,092 futures and options combined to
24,201. The fuel gained 0.6 cent to $2.9215 a gallon in the
report week.

Gasoline Bets

Net-long bets on gasoline declined by 1,691 futures and
options combined, or 3 percent, to 55,652, the least since Feb.
25, the CFTC data showed.

Futures decreased 2 cents in the reporting period to
$2.8828 a gallon on the Nymex.

Regular gasoline at the pump, averaged nationwide, gained
0.1 cent to $3.537 a gallon March 27, the highest level since
Sept. 12, according to Heathrow, Florida-based AAA, the largest
U.S. motoring group.

The slump in natural gas from the winter highs is “really
perplexing,” Schork said. “We’ve been lulled into this sense
that there is a lot of production. We’re in this mode where you
buy every dip in this market because we are in this transition
from a buyer’s market to a seller’s market.”